Navigating the Economic Landscape

Did Wall Street Violate the Racketeering Act…AGAIN??!!

Posted by Larry Doyle on April 29, 2011 11:46 AM |

Earlier this month I inquired Did Wall Street Violate the Racketeering Act? in regard to the rampant abuses centered on Wall Street institutions involved in the mortgage foreclosure travesty. That commentary written on April 4th generated the strongest and most vocal reaction to any commentary I have written since the inception of Sense on Cents in January 2009. (I encourage you to scan the comments to that article to gain a sense of the pain and anguish felt by so many in our nation today!)

Today I repeat the question.

“Did Wall Street Violate the Racketeering Act …Again??” in regard to the pricing and potential manipulation of the credit derivatives market? Why has Wall Street fought the legislative and regulatory proposals to bring greater transparency into this corner of the casino? Why does Wall Street want to maintain its hegemony over the cash cow known as ‘credit derivatives’? Let’s navigate across the pond and review a probe of Wall Street’s CDS business by the EU. The European Union put out this official press release this morning:

The European Commission has opened two antitrust investigations concerning the Credit Default Swaps market. CDS are financial instruments meant to protect investors in the event a company or State they have invested in default on their payments. They are also used as speculative tools. In the first case, the Commission will examine whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. If proven such behaviour would be a violation of EU antitrust rules.

In the second case, the Commission opened proceedings against 9 of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the 9 banks have the effect of locking them in the ICE system to the detriment of competitors.

Let’s see here, we have questions regarding:
1. collusion
2. abusing a dominant position
3. controlling financial information
4. violation of antitrust rules
5. engaging in practices to the detriment of competitors

Where I grew up, we would define these types of practices as a ‘racket.’ As such, did the banks involved in such practices violate the Racketeering Act established to prevent these types of behaviors? Let’s dig a little deeper into the EU’s release.

The first investigation focuses on the financial information necessary for trading CDS. The Commission has indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers.

The probe will also examine the behaviour of Markit, a UK-based company created originally to enhance transparency in the CDS market. The Commission is now concerned certain clauses in Markit’s licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information.

What type of kickbacks and payoffs do you think may have been provided to Markit in the process? This could get very interesting.

Who pays? Who do you think?

The ultimate end user of the derivative products suffers and pays. In turn, so does society as a whole. Now do we see why Wall Street has little interest in bringing transparency into this space?

In the second case, the Commission is investigating a number of agreements between nine of the above 16 CDS dealers (Bank of America Corporation, Barclays Bank plc, Citigroup Inc, Crédit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JP Morgan Chase & Co, Morgan Stanley and UBS AG) and ICE Clear Europe. These agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE. They contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions. If proven, the practice would violate Art 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

Do the practices alleged in this EU release sound eerily similar to those employed by individuals and organizations involved in the carting business in many cities around our nation? You know how that works, right? Guys handing out envelopes and involved in ‘high pressure’ sales tactics in order to make sure things are ‘handled appropriately.’

Think if this activity is alleged to have occurred in the European Union, that it might just be happening here in the good ol’ US of A? You think?

Or are we still trying to recapitalize the large money center banks, so this investigation might not work currently for those in Washington supposedly charged with investor protection and market integrity?

I don’t know. I’m just asking. What do you think?

Comments, questions, constructive criticisms always encouraged and appreciated. I would especially like to hear from those involved in these markets. Your anonymity is totally protected. Thanks.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

This entry was posted
on Friday, April 29th, 2011 at 11:46 AM and is filed under Credit Derivative Swaps, derivatives, General.
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